Illusions of Generosity

By Lynne Munson

Yale announced today that it is increasing its endowment payout to $1.15 billion this year, or just over 5% of the value of its $22.5 billion endowment, and that it will be spending some of these newly released monies on financial aid. Yale's is the second in what is expected to be a string of announcements by America's wealthiest schools that they've finally decided--after decades of hoarding endowment monies--to share a modicum of those tax-free riches with students and others they were always intended to help.

Harvard was the first to say it would be spending more. The university impressed many just before Christmas with a new financial aid program that promises to discount tuition for students whose families earn 180k or less. Harvard’s annual aid to undergraduates will now total $120 million.

Massive spending figures like these always wow and can sometimes appear more impressive than they actually are. Let's give Harvard's new aid program a closer look. Harvard is indeed spending more on aid even in comparison to other heavily-endowed institutions. Take the University of Michigan, for example. Though Michigan’s endowment ranks in the nation’s top 10, this multi-campus system plans to offer its 40,000 undergraduates only $61 million in aid next year, or half of what Harvard will give to just 6,600 undergraduates.

Yet within the context of Harvard’s wealth even its new outlay for aid is miserly. Harvard sits on the largest fortune amassed by any institution in the history of our nation. Its endowment increased 23% last year to $34.9 billion. It took just eight days last year for Harvard’s endowment to earn enough to cover its entire undergraduate aid budget. And this new $22 million increase in aid amounts to a mere day and a half of earnings.

So the real news out of Harvard and Yale isn't that they are spending a bit more on aid. It is the fact that, despite a paradigm shift in the wealth of our colleges and universities, even the wealthiest among them remain unwilling to freeze tuition or even to entertain the notion of making themselves truly accessible to every deserving student.

Harvard and Yale are trendsetters in many areas, including financial aid. So their refusal to go tuition-free will speak volumes to their peers. Yet it isn’t just that these schools could provide free tuition to all of their students and never feel a pinch. It is the fact that in not doing so it is ignoring the wishes of alumni who have donated billions in the hope that Harvard and Yale will truly throw open their doors.

Let's look closely at Harvard again. The university won’t reveal how much of it’s endowment is restricted or for what purpose. But it participated in the annual National Association of College and University Business Offers survey which found that, on average, donors to higher education institutions with endowments exceeding $1 billion restrict 56% of their gifts. According to the Council for Aid to Education's "Voluntary Support of Education" study more than a third of restricted donations to higher education are designated for financial aid. In fact aid is more favored than support for any other activity including research, faculty salaries, and athletics combined.

Based on these findings, we can estimate that Harvard’s endowment includes $7 billion that donors have told the school to spend on financial aid. If Harvard deducts its new $120 million undergraduate aid budget from these funds the school will still roll over and reinvest nearly $6.9 billion in aid-restricted monies. Conservatively estimating that next year Harvard’s endowment doesn’t increase the over 20% it has in recent years, but that it goes up just 13.3% (its average annual increase since inception) those aid-restricted funds will earn almost $800 million, or 6.6 times the amount Harvard is now spending on aid.

Even if Harvard gave all of their undergraduates a free ride the school wouldn’t come close to spending even half of the interest it is receiving on just the aid-restricted portion of endowment. The full cost of allowing all undergrads to attend without any tuition, fee, or room and board costs would be $306 million. After deducting that amount the remaining $6.7 billion will still earn at least $584 million.

Harvard, Yale, and dozens of their peers are hoarding funds they should have spent years ago. This stockpiling is an affront to the alumni who have given so much to make college more accessible. It is also an expensive habit that economist Jane Gravelle of the Congressional Research Service estimates costs taxpayers $15 billion annually.

The incredible wealth amassed by our colleges and universities should redefine our expectations for many things, including financial aid. Instead of trying to shape those new expectations, the richest schools of all are hoping to be hailed for what amounts to token gifts. But this is not the time of year when we should be celebrating Ebenezers.